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In battle with Amazon, traditional retailers innovate, turn to Iterate

By Andy VuongThe Denver Post

Posted:
05/04/2014 12:01:00 AM MDT

(Click to enlarge) (The Denver Post)

With a tidal wave of store closures planned for 2014, brick-and-mortar retailers are staring at the harsh reality that they must finally scrap decades-old strategies and place often-risky digital technologies at the core of their business.

Major chains, including Best Buy and Sur La Table, are turning to Denver-based tech startups to close the innovation gap between them and Amazon, the online behemoth that spends more than $6 billion a year on research and development — roughly the amount one-time chief rival Barnes & Noble generates in annual revenue. That deep commitment on R&D has enabled Amazon to release groundbreaking features such as 1-Click Ordering and the Prime free two-day shipping subscription service.

"Innovation has to be built into the DNA of every retail executive very quickly, if not today," said Jeff Roster, an analyst with market research firm Gartner. "If you're going to be innovative, you're going to make mistakes. Historically in retail, that was not a great strategy for success for your individual careers."

With the exception of Walmart, traditional retailers generally don't have the firepower to compete with Amazon on R&D.

Iterate Studio, the brainchild of Denver serial entrepreneur Jon Nordmark, aims to level the playing field. The recently launched startup connects retailers with an army of tech firms that develop and test new features and services, such as website behavioral tracking.

About 20 retailers, including Yankee Candle and Sur La Table, have already signed up.

One example is technology that monitors how shoppers react to certain words and images on a product page, and adjusts in real time how subsequent pages appear based on the visitor's "Web persona."

"It's a fully managed innovation lab without having to commit anything more than the equivalent of one person's salary," Nordmark said. "They need it to just keep pace with today's powerhouse, which is Amazon."

Iterate each month will select a handful of emerging tech startups out of thousands worldwide, vet them for business impact and conduct tests using real samples of a retailer's website traffic, Nordmark said.

Those results will be shared with participating retailers.

New technologies

Iterate, backed with $1 million in seed funding, has 17 startups developing emerging technologies participating in the lab.

The lineup of tech companies includes Fanplayr, which analyzes a shopper's online behavior to deliver targeted incentives to help retailers close the deal.

Nordmark's Iterate co-founders include former executives from Apple, Jones International, PowerReviews (acquired by Bazaarvoice) and VitaminShoppe.com.

"You see that $6 billion number that Amazon is spending, and if you are Sears, JCPenney, Bed Bath & Beyond, you cannot spend that amount of money on your website. You just don't have it," said Iterate investor Sapna Shah, a former strategic consultant for Ann Taylor and Gap. "The genius of Iterate is they make this easy for the retailers, and they're in the perfect position to bring great startups that can really accelerate the retailer's e-commerce business."

In-store innovation

But retailers must also embrace innovation in stores, not just online.

A recent Deloitte study found that the use of digital devices — such as tablets and smartphones — influences 36 percent of all in-store purchases, representing $1.1 trillion in retail sales.

The rate of smartphone influence grew from 5 percent in 2012 to 19 percent in 2013, playing a role in $593 billion in sales.

Deloitte also found that the majority of in-store shoppers lean on their mobile devices or an unmanned kiosk — rather than a sales representative — for questions about products.

And 75 percent of consumers say information found on social networks influenced their shopping and enhanced brand loyalty.

"We are at a tipping point in retail, a point where digital channels should no longer be considered a separate or distinct business," Deloitte researchers wrote.

To that end, Best Buy teamed with Denver-based startup Wayin during the Christmas holidays to incorporate social shopping data into its in-store showroom.

Hardware chain Lowe's now allows shoppers to find exactly where a product is located in their stores via a smartphone app, eliminating the tradition of seeking out a person in a vest. The retailer is using technology from Point Inside, a software developer based in Bellevue, Wash.

Point Inside's chief marketing officer Todd Sherman, a former Amazon executive, said traditional retailers have to change their corporate culture in order to take advantage of their brick-and-mortar locations in a world where the majority of shoppers now essentially carry mini-computers as phones.

"Those stores are incredible assets," Sherman said. "What the retailers have to do is pull back a little bit and say, 'What's the best use of these stores, and how can we most effectively connect with shoppers now that they're bringing their computers into the store?' "

Over the past 18 months, office-supplies retailer Staples has increased the number of products it sells from 40,000 to 700,000, expanding to new categories such as education and medical. The move is similar to Amazon's expansion from books to nearly everything else, including toys, apparel and groceries.

Staples provides in-store shoppers access to the new offerings via redesigned kiosks, which promote an "endless aisle" concept, allowing shoppers to buy any of the 70,000 products even if the store doesn't carry them. About 15 percent of traffic to Staples.com comes from shoppers using the in-store kiosks, further blurring the line between online and brick-and-mortar revenue.

Shuttering stores

Staples is on the long list of retailers that are shuttering stores this year. Others include JCPenney, Radio Shack, Abercrombie & Fitch, and Barnes & Noble.

"Everybody in retail is caught in between (Walmart and Amazon)," Gartner's Roster said. "It's a forced process on how to transform their businesses."

The retail industry is responsible for one out of every five jobs in the U.S., he said.

Without a physical presence in the state, Amazon doesn't collect sales tax on purchases from residents. That means Colorado is losing out on tens of millions of dollars in annual sales-tax revenue, although lawmakers on Friday sent to Gov. Hickenlooper a measure that aims to require out-of-state e-tailers such as Amazon to start collecting the state sales tax.

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